Central banks bonanza; Chinese economy; US industrial production

YOUR GUIDE TO THIS WEEK'S BIG ECONOMIC EVENTS

A number of central banks hold their monetary-policy meetings this week, China reports several indicators of economic activity and US industrial production is expected to increase slightly.

China releases a raft of economic indicators. Monthly activity was weaker than expected in July, largely reversing the pickup in June. There will probably be a modest upward correction in August, but the underlying trend will remain one of gradually slowing growth. Looking into the detail, industrial-production growth is expected to rise from 4.8% to 5.2% year-on-year. Manufacturing surveys have delivered mixed messages – the manufacturing Purchasing Managers’ Index (PMI), released by the National Bureau of Statistics, deteriorated further in August, while the Caixin metric posted a modest improvement. Both indices are running at about 50, which is broadly consistent with stagnation in manufacturing activity. Meanwhile, consensus estimates expect fixed-asset-investment growth to be unchanged at 5.7% year-on-year. While US-China trade tensions and a slowing housing market will probably continue to weigh on manufacturing and real-estate investment, policy stimulus should provide a boost – particularly for infrastructure investment. Finally, retail-sales growth is expected to increase from 7.6% to 7.9% year-on-year. Tax cuts implemented earlier this year should continue to support consumption, although a weaker labour market could provide some headwinds.

US industrial production should rise by 0.2% month-on-month in August, reversing the 0.2% fall in July. Manufacturing output is expected to record a similar increase, following a 0.4% fall the month before. The two main manufacturing surveys have fallen sharply in recent months, probably reflecting trade-related uncertainty and weaker external demand. The Markit manufacturing PMI is running at 50.3, while the ISM manufacturing index stands at 49.1 – this indicates stagnation or even a slight contraction in manufacturing activity.

Japan reports trade activity. Consensus estimates expect exports to shrink by 10.5% year-on-year in August, following a 1.5% decline the month before. Exports have contracted throughout 2019, reflecting trade tensions and weak demand. In the UK, consumer-price inflation (CPI) probably edged down from 2.1% to around 1.8%-1.9% in August. This reflects lower energy prices and to a lesser extent core inflation, which probably fell from 1.9% to 1.8%. CPI has hovered around 1.8%-2.1% since last December, broadly matching the Bank of England’s (BoE’s) inflation target. But the recent drop in oil prices means CPI will probably move lower in the short term. Meanwhile, eurozone inflation – as measured by the Harmonised Index of Consumer Prices – will probably be unchanged at 1% in August. The focus will be on core inflation, which came in weaker than expected at 0.9% in the August preliminary report. Core inflation has averaged about 1% in 2019 – the same as last year – which is about half the European Central Bank’s (ECB’s) target. Across the Atlantic, Canada also reports inflation figures. Consensus estimates expect the average of the Bank of Canada’s preferred core inflation measures – CPI trim, CPI median and CPI common – to be unchanged at 2% for the third consecutive month in August. Inflation is currently running at about the mid-point of the bank’s 1%-3% target range. Meanwhile, the Federal Reserve (Fed) is expected to cut interest rates by 25bps to 1.75%-2% in response to mixed signals about the economic outlook and persistent – if not increasing – risks surrounding international trade policies and external demand. The divergence between weak manufacturing activity and a resilient services sector – which mirrors poor business sentiment and solid consumer confidence – has widened since the Fed’s last meeting. The labour market also shows some signs of stress – the previous two employment reports suggested that the pace of job creation has slowed, particularly in the private sector. Private employment expanded by 129,000 people a month on average over the past three months, compared to 215,000 a month in 2018. There are signs that negative business sentiment has started to affect hiring decisions. If this continues, consumption – the main driver of economic growth – could be affected. And while inflation has risen recently, it is still below target and the increase in prices was more likely down to higher tariffs than rising demand. Despite this, the Fed will probably frame its move as another mid-cycle insurance cut rather than the start of an outright easing cycle. This should be reflected in the updated dot plot, which will probably show only one additional rate cut in 2020 and no change for the following years. Chairman Jerome Powell will probably respond to growing uncertainty by adopting a more cautious tone at the press conference: he could indicate that he is more open-minded about the length and depth of the current easing cycle. Further south, the Brazilian central bank also meets. Consensus estimates expect the bank to slash interest rates by 50bps to 5.5%, following a larger-than-expected cut in July. Brazilian growth has been sluggish this year and is likely to come in at 1% year-on-year for the whole of 2019, as trade tensions and fatigue about domestic reforms weigh down business confidence. As inflation is within the 4.25% target and fiscal policy will probably become more restrictive, there is a case for somewhat easier monetary policy going forward. Meanwhile, New Zealand reports GDP figures. The economy is expected to expand by 0.4% quarter-on-quarter in Q2, following a 0.6% rise in the first three months of the year. GDP growth is likely to come in at about 2.5% for 2019, down from 2.8% last year.

The Bank of Japan (BoJ) meets and is expected to keep its policies unchanged for the time being, sticking to the yield-curve-control policy which pins the policy rate at -0.1% and the 10-year government-bond yield at about zero. Going forward, the BoJ will closely monitor trade conditions and the impact of the consumption-tax increase – due to take place in October – as it considers possible policy adjustments. Meanwhile, consensus estimates are split on whether the Indonesian central bank will keep interest rates on hold or cut them by 25bps to 5.25%. Given the dovish sentiment that has prevailed among other central banks, a rate cut seems likely. Elsewhere, the Swiss central bank will probably keep its policy rate unchanged at -0.75%. The central bank was one of the first to resort to negative policy rates to prevent excessive currency appreciation. Meanwhile, the Norwegian central bank also meets. The Norges Bank is one of the few central banks to retain a tightening bias – it raised interest rates twice this year and expects to hike them again in Q4. In August, the bank stated that the outlook was relatively unchanged from June but acknowledged that uncertainty had risen due to trade tensions and Brexit. It is unclear whether the bank will raise interest rates at this meeting or later on in the year. Regardless of the timing, the next hike is likely to be the last for a while given the uncertainties that cloud the outlook. Across the Channel, the BoE will probably stick to stick to its wait-and-see mode. Trade tensions and Brexit-related uncertainty meant the BoE adopted a neutral bias with regard to its near-term policies in August, but it did reiterate that some limited tightening would be needed in the longer term should there be a smooth Brexit transition. Since then, economic data has been mixed – consumption has been bolstered by a strong labour market while business activity has deteriorated further – and political developments suggest that Brexit-related uncertainty is likely to drag on, while trade tensions persist. This means that the BoE will probably retain its current framework, which gives it flexibility in an environment of elevated uncertainty. Separately, the UK reports retail sales. Consumption has been a bright spot since the Brexit referendum, largely reflecting a strong labour market. Retail sales (excluding fuel) increased by 0.7% quarter-on-quarter in Q2, following a 1.5% rise in the first three months of this year. Consensus estimates expect a correction of -0.3% in August, following a 0.2% rise the month before. Elsewhere, the South African central bank meets. Consensus estimates expect interest rates to be unchanged at 6.5%, following a 25bp cut in July. Meanwhile, the eurozone releases current-account data. The bloc has run a large current-account surplus in recent years – it came to 3% of GDP in 2018, before falling to 2.4% in the second quarter of this year. In absolute terms, the surplus fell from €30.3bn in May to €18.4bn in June and is likely to be broadly the same in July. In the US, the current-account deficit is expected to shrink slightly from $130.4bn in the first three months of this year to $126bn in Q2. But at 2.4% of GDP, this is still one of the highest readings since the end of 2008. Meanwhile, Australia releases its employment report. The Australian labour market has performed better than other parts of the economy and 330,000 jobs were added last year. But at 5.2%, the unemployment rate is some way off the central bank’s estimate of the non-accelerating inflation rate of unemployment, which stands at 4.5%. This suggests that inflationary pressures are subdued. In Argentina, consensus estimates expect GDP to expand for the first time in six quarters in Q2 2019. But the economy is still likely to shrink by 2% throughout the whole year, after contracting by 2.5% in 2018.

Japan reports CPI. Core inflation (excluding energy and fresh food) is likely to edge down from 0.6% to 0.5% in August. Inflation is well below the BoJ’s 2% target – core inflation has averaged 0.5% this year, little changed from 2018. Meanwhile, the eurozone releases consumer-confidence data. The index has moved between -7.5 and -6.5 since the start of the year and came in at -7.1 in August, somewhat above the long-term average of -10.5. It is likely to remain within this range in September, reflecting the relative strength of the labour market.

CHART OF THE WEEK

US core inflation likely boosted by higher tariffs

Source: Refinitiv, US Bureau of Labour Statistics, as at September 2019.

US headline inflation was weaker than expected in August, falling from 1.8% to 1.7%. But after stripping out erratic energy and food prices, inflation rose this summer. Core inflation expanded by 0.3% month-on-month for three consecutive months, while the three-month annualised rate shot up to 3.4% – the highest since 2006. But core-services inflation – a measure of domestic demand – was little changed at 3% year-on-year, while core-goods inflation accounted for almost 70% of the rise in core inflation since May. This is probably down to the tariffs imposed in the spring, which suggests that prices could rise further if tariffs on imported Chinese consumer goods go ahead in December. This is the wrong sort of inflation – cost-push rather than demand-pull – and could end up damaging consumption. If this happens, the Fed would probably look beyond tariff-boosted inflation numbers and provide further easing.

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Silvia joined Hermes in October 2017. As an experienced global economist, she is responsible for providing macroeconomic analysis and commentary, non-standard macroeconomic modelling, and developing relationships with key central banks and monetary authorities. Silvia previously spent 10 years at Prologue Capital Ltd, latterly as a global economist responsible for the team’s macroeconomic view. She holds a Master of Science in Economic and Social Sciences, as well as a Bachelor in Economic and Social Sciences, from Bocconi University in Italy.